Average-case competitive analyses for one-way trading

Consider a trader who exchanges one dollar into yen and assume that the exchange rate fluctuates within the interval [m, M]. The game ends without advance notice, then the trader is forced to exchange all the remaining dollars at the minimum rate m. El-Yaniv et al. presented the optimal worst-case threat-based strategy for this game (El-Yaniv et al. 2001). In this paper, under the assumption that the distribution of the maximum exchange rate is known, we provide average-case analyses using all the reasonable optimization measures and derive different optimal strategies for each of them. Remarkable differences in behavior are as follows: Unlike other strategies, the average-case threat-based strategy that minimizes E[OPT/ALG] exchanges little by little. The maximization of E[ALG/OPT] and the minimization of E[OPT]/E[ALG] lead to similar strategies in that both exchange all at once. However, their timing is different. We also prove minimax theorems with respect to each objective function.ArticleJOURNAL OF COMBINATORIAL OPTIMIZATION. 21(1): 83-107 (2011)journal articl

Differentiation and Dynamics of Competitiveness Impacts from the EU ETS

We summarise the main factors that differentiate impacts of the EU ETS on profitability and market share. By examining and sampling a range of sectors, we present some simple metrics and indicators to help judge the nature of potential impacts. We also consider briefly the mitigation response to these impacts by sectors, and how they may evolve over time. The broad conclusion confirms the aggregate findings presented in the existing literature - more participating sectors are likely to profit under the current ETS structure out to 2012 at the cost of a modest loss of market share, but this may not hold for individual companies and regions. The period 2008-12 can assist technology investments and diversification, providing the continuation and basic principles of the EU ETS post-2012 is quickly defined and incentives are in place for sectors to pursue this

The growth of bilateralism

One of the most notable international economic events over the past 20 years has been the proliferation of bilateral free trade agreements (FTAs). Bilateral agreements account for 80 percent of all agreements notified to the WTO, 94 percent of those signed or under negotiation, and currently 100 percent of those at the proposal stage. Some have argued that the growth of bilateralism is attributable to governments having pursued a policy of “competitive liberalization" - implementing bilateral FTAs to offset potential trade diversion caused by FTAs of “third-country-pairs" - but the growth of bilateralism can also be attributed potentially to “tariff complementarity" - the incentive for FTA members to reduce their external tariffs on nonmembers. Guided by new comparative statics from the numerical general equilibrium monopolistic competition model of FTA economic determinants in Baier and Bergstrand (2004), we augment their parsimonious logit (and probit) model of the economic determinants of bilateral FTAs to incorporate theory-motivated indexes to examine the influence of existing memberships on subsequent FTA formations. The model can predict correctly 90 percent of the bilateral FTAs within five years of their formation, while still predicting “No-FTA" correctly in 90 percent of the observations when no FTA exists, using a sample of over 350,000 observations for pairings of 146 countries from 1960-2005. Even imposing the higher correct prediction rate of “No-FTA" of 97 percent in Baier and Bergstrand (2004), the parsimonious model still predicts correctly 75 percent of these rare FTA events; only 3 percent of the observations reflect a country-pair having an FTA in any year. The results suggest that - while evidence supports that “competitive liberalization" is a force for bilateralism - the effect on the likelihood a pair of countries forming an FTA of the pair's own FTAs with other countries (i.e., tariff complementarity) is likely just as important as the effect of third-country-pairs' FTAs (i.e., competitive liberalization) for the growth of bilateralism

Evaluating the Information Efficiency of Australian Electricity Spot Markets: Multiple Variance Ratio Tests of Random Walks

This paper examines whether Australian electricity spot prices follow a random walk. Daily peak and off-peak (base load) prices for New South Wales, Victoria, Queensland and South Australia are sampled over the period July 1999 to June 2001 and analysed using multiple variance ratio tests. The results indicate that the null hypothesis of a random walk can be rejected in all peak period and most off-period markets because of the autocorrelation of returns. For the Victorian market, the off-peak period electricity spot price follows a random walk. One implication of the study is that in most instances, stochastic autoregressive modelling techniques may be adequate for forecasting electricity prices

The Essential Role of Securities Regulation

This Article posits that the essential role of securities regulation is to create a competitive market for sophisticated professional investors and analysts (information traders). The Article advances two related theses-one descriptive and the other normative. Descriptively, the Article demonstrates that securities regulation is specifically designed to facilitate and protect the work of information traders. Securities regulation may be divided into three broad categories: (i) disclosure duties; (ii) restrictions on fraud and manipulation; and (iii) restrictions on insider trading-each of which contributes to the creation of a vibrant market for information traders. Disclosure duties reduce information traders\u27 costs of searching and gathering information. Restrictions on fraud and manipulation lower information traders\u27 cost of verifying the credibility of information, and thus enhance information traders\u27 ability to make accurate predictions. Finally, restrictions on insider trading protect information traders from competition from insiders that would undermine information traders\u27 ability to recoup their investment in information. Normatively, the Article shows that information traders can best underwrite efficient and liquid capital markets, and, hence, it is this group that securities regulation should strive to protect. Our account has important implications for several policy debates. First, our account supports the system of mandatory disclosure. We show that, although market forces may provide management with an adequate incentive to disclose at the initial public offering (IPO) stage, they cannot be relied on to effect optimal disclosure thereafter. Second, our analysis categorically rejects calls to limit disclosure duties to hard information and self-dealing by management. Third, our analysis supports the use of the fraud-on-the-market presumption in all fraud cases even when markets are inefficient. Fourth, our analysis suggests that in cases involving corporate misstatements, the appropriate standard of care should, in principle, be negligence, not fraud

Pricing Strategies Under Emissions Trading: An Experimental Analysis

An important feature in the design of an emissions trading program is how emissions allowances are initially distributed into the market. In a competitive market the choice between an auction and free allocation should, according to economic theory, not have any influence on firms’ production choices nor on consumer prices. However, many observers expect the method of allocation to affect product prices. This paper reports on the use of experimental methods to investigate behavior with respect to how prices will be determined under a cap-and-trade program. Participants initially display a variety of pricing strategies. However, given a simple economic setting in which earnings depend on this behavior, we find that subjects learn to consider the value of allowances and overall behavior moves toward that predicted by economic theory.carbon dioxide; climate change; emissions trading; distributional effects; electricity; allocation; auctions

The Essential Role of Securities Regulation

This Article posits that the essential role of securities regulation is to create a competitive market for sophisticated professional investors and analysts (information traders). The Article advances two related theses-one descriptive and the other normative. Descriptively, the Article demonstrates that securities regulation is specifically designed to facilitate and protect the work of information traders. Securities regulation may be divided into three broad categories: (i) disclosure duties; (ii) restrictions on fraud and manipulation; and (iii) restrictions on insider trading-each of which contributes to the creation of a vibrant market for information traders. Disclosure duties reduce information traders\u27 costs of searching and gathering information. Restrictions on fraud and manipulation lower information traders\u27 cost of verifying the credibility of information, and thus enhance information traders\u27 ability to make accurate predictions. Finally, restrictions on insider trading protect information traders from competition from insiders that would undermine information traders\u27 ability to recoup their investment in information. Normatively, the Article shows that information traders can best underwrite efficient and liquid capital markets, and, hence, it is this group that securities regulation should strive to protect. Our account has important implications for several policy debates. First, our account supports the system of mandatory disclosure. We show that, although market forces may provide management with an adequate incentive to disclose at the initial public offering (IPO) stage, they cannot be relied on to effect optimal disclosure thereafter. Second, our analysis categorically rejects calls to limit disclosure duties to hard information and self-dealing by management. Third, our analysis supports the use of the fraud-on-the-market presumption in all fraud cases even when markets are inefficient. Fourth, our analysis suggests that in cases involving corporate misstatements, the appropriate standard of care should, in principle, be negligence, not fraud

Learning Algorithms in a Decentralized General Equilibrium Model

A model is developed in which economic agents learn to make price-setting, price-response, and resource allocation decisions in decentralized markets where all information and interaction is local. Computer simulation shows that it is possible for agents to act almost as if they had the additional necessary information to define and solve a standard optimization problem. Their behaviour gives rise endogenously to phenomena resembling Adam Smith's invisible hand. The results also indicate that agents must engage in some form of price comparison for decentralized markets to clear--otherwise there is no incentive for firms to respond to excess supply by lowering prices. This suggests that agent-based models with decentralized interaction risk untenable results if price-response decisions are made without being first directed toward the most favourable local price.